the case of dynamic currency conversion

A New Regulation to Increase Transparency

Cross-border payments have always been a point of
considerable interest and concern for EU banks and the EU payments industry in
general. Several different regulations have been put in place over the years,
with the latest one created in 2009. A new regulation was proposed by the
European Commission in 2018, expanding the scope of cross-border payment rules
beyond Member States using the euro.

One Fee
to Rule Them All

This new regulation would require all European Union payment
service providers to charge the same fees for euro-based cross-border
transactions as they do for local currency-based domestic ones. The move,
hailed by consumer rights groups, is expected to bring about cheaper
transactions in euro for all non-euro countries, thus saving both consumers and
businesses up to a billion euro per year.

Unfavorable
for Customers

Research by several
consumer rights organizations makes it clear that there is definitely a case to
be made here, since cross-border bank transfers in euro have been shown to
range from €1.19 in Poland to €24.03 in Bulgaria.

The European Consumer Organization
(BEUC) performed research in the United Kingdom and discovered that the charge
costs caused UK consumers to incur losses of up to £500m per year. BEUC research also showed that choosing the "home
currency" option for transactions was a worse deal for the customer 9 times out of
10.

What It
Was All About

Under the previous regulation payment service providers
could opt-in when it came to using equal fees for domestic and cross-border
payments but for the most part they did not take up the option. This was due to
PSPs incurring losses when offering cross-border local currency transactions,
which is also the reason such transactions are not present in the proposed
regulation.

Conversion
Rates into the Clear

The new regulation would also provide the additional benefit
of preventing the practice of payment service providers compensating for
reduced revenue through, from certain consumer experiences, not fully
transparent currency conversion rates. Their costs are usually not known
to payment service users and could be discerned only by consulting your account
statements before and after a transaction and doing some math and conversions
of your own. This practice is known as Dynamic Currency Conversion or DCC.

DCC applies to both card
purchases and cash withdrawals made abroad; in both cases the payment service
provider offers the payer a choice between paying in their domestic currency or
local currency.

However, the new regulation would require these payment
providers to clearly display the exchange ratesoffered, as well as to display all
reference rates and any additional costs before the payment service user
decides to finish the transaction.

This has, however, raised some concerns regarding the
technical side of the regulation's implementation, since the exchange rates
would need to be displayed not only on mobile devices but also on ATMs.

Implementation
and Transparency

The proposal also calls for
the European Banking Authority to draft technical standards that would outline
how exactly these transparency rules would be implemented in practice.

While these standards are being developed and tested, EBA
would also provide an interim solution by setting an upper limit on the total
charges providers are allowed to offer for currency conversion.

The European Commission proposed January1, 2019 as
the application date of the new regulation, and October 2022 was marked as the
date the effectiveness review for the regulation.